Retooling Detroit

December 25, 2008 7:06 pm

The $17.4 million loan President Bush made available to carmakers last week isn’t so much a bailout as a lifeline to keep the companies operational while they -— very quickly — come up with a plan to make themselves financially viable. While the loan was necessary, it comes at a high cost to General Motors and Chrysler; the companies now have three months to address problems that were years, if not decades, in the making.

It will be up to the Obama administration to decide what help, and how much, to offer next. No further assistance should be forthcoming until a valid plan for reshaping the companies is accepted by the White House, autoworker unions, creditors and other key players.

After Congress failed to pass an assistance package earlier this month, it fell to President Bush to decide whether to help the country’s Big Three automakers. Putting aside his free-market principles, the president said the companies’ survival was important to the United States’ economic health and offered the loan.

GM and Chrysler plan to begin using the money by the end of the month to pay suppliers. Both companies have announced long holiday factory closures to reduce costs. As a result, ZF Lemforder, a maker of car components, has announced furloughs at its facilities. Forty-five workers at its plant in Brewer will be out of work for three to four weeks because there is no demand for its parts. This highlights the dangerous ripple effects that spread from Detroit when demand for cars drops.

As evidence that the $700 billion bailout targeted to the financial sector is related to Detroit’s woes, many car dealers are reporting that potential buyers with good credit are being denied car loans. Credit qualifications clearly needed to be tightened — the approval of mortgages with monthly payments higher than applicants’ incomes was unconscionable. But, lenders may have gone too far, further worsening the credit freeze and dampening demand for new cars. This would be a prudent area of inquiry for those overseeing the Troubled Asset Relief Program.

In the meantime, GM and Chrysler have their work cut out for them. Ford has said it doesn’t need immediate financial assistance. By March 31, the companies must have a plan for their viability. Even sooner, they must convince creditors to turn debt into equity to free up badly needed funds. Harder, the companies must get concessions from the autoworkers union, which has already said the package is unfair.

The hardest task for the heavily Democratic Congress that takes over next year will be to convince union leaders that some changes they don’t like are necessary to ensure the survival of their members’ employers.

GM has already said it is considering shedding some of its eight brands, shutting factories and cutting jobs. The loan plan also calls for the elimination of executive perks. President-elect Obama has said he expects the companies to make more fuel-efficient, less polluting vehicles.

All of this, and likely more, is needed to put American carmakers on the road to recovery.